Manual underwriting guidelines for FHA and VA loans are almost identical. VA and FHA loans are the nation’s only two mortgage loan programs that allow manual underwriting on owner-occupant primary residency mortgage loans. HUD, the parent of FHA, is the federal government agency administering FHA loans. Michelle McCue of Gustan Cho Associates is an expert in manual underwriting guidelines on VA and FHA loans. Here is what Michelle McCue said about FHA and VA manual underwriting guidelines.
The Veterans Administration and the U.S. Department of Housing and Urban Development aim to insure VA and FHA loans if borrowers default on these two government-backed loans. Private lenders are the financial institutions that originate, process, underwrite, fund, and service VA and FHA loans.
After the VA and FHA loan funds, lenders sell VA and FHA loans on the secondary market. Fannie Mae and Freddie Mac are the two mortgage giants in keeping liquidity in the housing markets in the United States. The following paragraphs will cover the manual underwriting guidelines on FHA and VA loans.
Guidelines on Government-Backed Mortgages
The three government-backed mortgage loans in the nation are FHA, VA, and USDA loans. Due to the government guarantee, lenders aggressively originate and fund FHA, VA, and USDA loans at little to no down payment, lenient mortgage guidelines, at competitive rates.
Fannie and Freddie are government-sponsored enterprises (GSEs). They are the two largest purchasers of mortgage-backed securities in the nation. The role of Fannie Mae and Freddie Mac is to keep liquidity in the mortgage markets. Fannie Mae and Freddie Mac will only purchase conforming mortgage loans.
Any government agency does not back conventional loans. However, lenders originating conventional loans plan on selling the conventional loans they fund to Fannie Mae to Freddie Mac. Fannie Mae and Freddie Mac only purchase mortgage loans that conform to their agency mortgage guidelines. Lenders do not do manual underwriting on conventional loans. Only FHA and VA loans allow for manual underwriting. The following sections cover manual underwriting guidelines on FHA and VA loans.
Differences Between FHA Versus Manual Underwriting Guidelines
Statistics prove veterans have lower credit profiles than civilians. This is because veterans get transferred every so many years. Veterans also have a difficult time paying bills on time during deployment. According to Michael McCue of Gustan Cho Associates, VA loans has lenient manual underwriting guidelines versus FHA loans. Here is what Mike McCue says about VA versus FHA manual underwriting guidelines:
VA manual underwriting guidelines require 12 months timely payments on all monthly debt payments to qualify for VA loans. HUD require timely payments for the past 24 months on all monthly debt payments on FHA loans.
VA loans have lenient mortgage guidelines compared to FHA loans. The waiting period after foreclosure, deed-in-lieu of foreclosure, or short is two years versus three years on FHA loans. However, statistics show fewer VA loans default than FHA loans, even with lower credit standards on VA loans.
What Is The Role of Fannie Mae and Freddie Mac
The role of Fannie Mae and Freddie Mac is to keep liquidity in the housing markets by providing liquidity for mortgage bankers. How do Fannie Mae and Freddie Mac provide liquidity for the mortgage market? Fannie Mae and Freddie Mac are the two mortgage giants in the United States.
By buying funded loans from private lenders, lenders can pay down the warehouse lines of credit they use to fund the government and conventional loans. By replenishing the lender’s warehouse line of credit, lenders can repeat the mortgage origination process and make money. Due to the liquidity, lenders can keep originating and funding loans at competitive rates.
However, manual underwriting guidelines on VA loans are more lenient on VA home loans versus FHA loans. The Veterans Administration is the federal agency responsible for creating the agency mortgage guidelines on VA loans. VA loans are one of the three government-backed mortgage loan programs in the United States.
Compensating Factors on FHA and VA Loans
Manual underwriting guidelines cap maximum front-end and back-end debt-to-income ratio cap based on the number of compensating factors.
Both HUD nor the Veterans Administration are not lenders. These two giant government agencies are the government agencies administering VA and FHA loans.
Manual Underwriting Guidelines on FHA and VA loans are the same concerning timely payments and front-end and back-end DTI.
Manual Underwriting Guidelines on Debt-To-Income Ratios
The maximum front-end debt-to-income ratio is 31%, and the back-end is 43% on manual underwrites on FHA and VA loans with no compensating factors.
More so on VA loans. Mortgage underwriters can exceed the recommended debt-to-income ratio manual underwriting guidelines on FHA and VA loans if they see strong compensating factors and extenuating circumstances.
The maximum front-end debt-to-income ratio is 37%, and the back-end DTI is 47% with one compensating factor. The debt-to-income ratio increases to 40% front-end and 50% back-end with two compensating factors on FHA and VA loans. Mortgage underwriters have a lot of underwriters discretion on manual underwrites on FHA and VA loans.
